Can plant-based drinks lift Starbucks’ share price?

Investors have recently been milking the returns of plant-based food and drink companies, but can this positive sentiment put Starbucks Corporation’s [SBUX] share price on an upward trend?

Starbucks’ share price has struggled to pick up momentum so far this year after falling 9.5% in January. Despite the multinational coffeehouse chain’s roll out of a new range of non-dairy drinks across its US stores on 2 March, the stock only climbed by 1.1% throughout the whole of that month. 

So far this month, Starbucks' share price is up 3.5% to $113.04 (to 8 April’s close). The company’s stock saw a year-to-date rise of 6.1%, underperforming the S&P 500’s climb of 9.1% during the same period.

According to ETF.com, 207 ETFs in the US hold circa 87.3 million Starbucks shares. As of 7 April, the iShares Evolved U.S. Consumer Staples ETF [IECS] had a 4.51% weighting in the stock and was up 4.1% year to date.

Plant-based menu innovation

The response of customers to Starbucks’ partnership with Oatly was “positive” according to a statement made by the company, seen byMarketWatch.

This insight came off the back of reports that the coffeehouse chain had been running out of oat milk at its US stores, leading it to make the statement on 7 April, which helped send its share price to an intraday high of $113.76.           

“As more customers return to our stores, some may experience a temporary shortage of oat milk at their store… We apologise for any inconvenience to the customer experience and recommend trying soy milk, almond milk or coconut milk. Customers will have oat milk available in their store soon,” the company said.

Starbucks’ outsized demand for the dairy alternative is a good indication of the investment opportunity in the plant-based food and drink industry.

For Kevin Johnson, president and CEO at Starbucks, it’s the most significant investment trend. “If I think about both beverage and food, the number one trend I would highlight there are the consumer shift and consumer preferences around plant-based,” he said during the company’s first-quarter earnings call in late January.

"the number one trend I would highlight there are the consumer shift and consumer preferences around plant-based" - Kevin Johnson, Starbucks president and CEO

Starbucks first started offering non-dairy alternatives in 1997 with the option of soy milk. It introduced oat milk, which had been on European menus since 2018, at a regional launch across 1,300 US stores in January last year.

One of its stores in Seattle now has a 100% plant-based menu, Johnson said during the earnings call, which is used as a test area for product innovations.

A growing trend

The global plant-based food and beverage alternatives market is forecast to hit $32.3bn by 2027, according to Emergen Research, suggesting the size of the opportunity is significant for investors.

The shift in consumer preferences towards more sustainable options has prompted retailers like Starbucks, the Kellogg Company [K] and Kroger [KR] to invest in expanding plant-based menus. The launch of faux-meat companies, such as Beyond Meat [BYND] and The Very Good Food Company [VRYYF] and the hotly-anticipated debut of Oatly has helped to drive investor interest.

However, at the time of writing, only one fund invests solely in the plant-based trend. That is the US Vegan Climate ETF [VEGN]. The fund was launched in 2019 by Beyond Investing and is up 7.7% year-to-date (through 8 April). While the ETF used to have Starbucks in its holdings, as of 9 April, the stock was not part of the fund.

Analysts generally appear bullish for the coffeehouse chain’s long-term growth potential. Edward Lewis, an equity analyst at Atlantic Equities, initiated coverage of the stock with an overweight rating and a $128 price target on 6 April, according to The Fly,

Given that the company had more “skin in the game” as an operator than a franchisor, Lewis believes it has more potential for a V-shaped recovery in 2021 and 2022.

Starbucks’ share price was rated a moderate buy based on 25 analysts polled by TipRanks, with an average price target of $115.65, representing a 2.3% upside from its 8 April close.